Why Equity Crowdfunding Won't Happen This Year

President Barack Obama shakes hand with Sen. Scott Brown during the signing of JOBS Act bill.

The following guest post is by David Drake, founder and chairman of LDJ Capital, a New York City private-equity firm, and of The Soho Loft Capital Creation Events series, a global events and media company.

It seems crowdfunding for equity in the US will take at least another year before it transforms the legislative and regulatory Securities & Exchange Commission Act of 1933 and 1934. The US is the first and only country in the world actually changing its charters to allow crowdfunding for equity to roam freely among its citizens. The negativity from naysayers has been adamant and deliberate. Yet we maintain that the industry is estimated to reach $6 billion in 2013.

I have outlined 10 Steps necessary for the implementation of crowdfunding for equity (where stocks are exchanged for cash via online sites), which was part of President Obama’s Jumpstart Our Business Startup (JOBS) Act, signed into law April 5, 2012 and soon to see its first anniversary. The SEC had a deadline to interpret the intentions of the House of Representatives and the Senate in the JOBS Act and to translate those intentions into compliant laws and procedures. The SEC has to date facilitated enacting 3 out of 6 title provisions of the Act – the outstanding three are Regulation A plus, exemption Regulation D, 506c that removes the solicitation ban from private offerings under SEC and crowdfunding offerings online (cash for stock). Yet, crowdfunding for equity’s deadline passed without implementation on January 1, 2013 and here are some of the reasons.

By the way, crowdfunding is one pillar of crowdsourcing like crowd labor and crowd innovation. Crowdfunding has four sectors of donation, reward, debt and equity. Equity is the only issue in the JOBS Act where the SEC oversees any transactions of stocks in companies being offered. It is similar to Kickstarter’s[1] donation system but where you receive stock instead of rewards for cash.

The SEC Chairwoman Mary Shapiro resigned Dec. 14, 2012 prior to our first article. Elisse Walterbecame the interim chairwoman of the SEC and a couple of weeks ago Mary Jo White was appointed by the White House to take the chair seat for the SEC current term expiring year end. We outlined the process the SEC needs to follow and estimated the crowdfunding for stock title III of the JOBS Act would at the earliest become a legality January 2013 should all things be perfect.

President Obama announced his nomination of Mary Jo White as the new head of SEC last Jan. 24, 2013. Image from White House video of the announcement.

The SEC needs to submit a proposal and allow 30-90 days for public comments. In this case it will most likely be 90 days. However, the clock of any regulatory change does not commence until a proposal has been made. I can imagine the fury Elisse Walter experienced when the White House proposed to replace her so early into 2013. Did she know when she was appointed in December that she was a placeholder for Mary Jo White?

Regardless, the staff of the SEC has been very hard at work and have certainly developed a rough draft of a crowdfunding proposal in the last 6 months. Unless Elisse Walter pushes fora proposal to be voted on by the 4 commissioners who vote on these matters with Walter, it is likely that our predictions about the timing of the SEC process from November last stand firm.

Mary Jo White will have her Congressional hearing and if passed will be able to take office by early May 2013 (end of April at the earliest). Thereafter a new Chairman of the SEC needs 45-60 days to catch up on current events. The Dodd Frank Act[1] for funds and policing big business since the 2008 crisis began has been lagging for several years and much is still unresolved yet a priority. However, we need job creation which the JOBS Act with 6 bills, and which was passed with bi-partisan support last spring, promises. The JOBS Act initiatives creating jobs seems much more relevant today than bureaucratic band aids on the stagnating operations of past firms, current big banks and their practices. So should Mary Jo White be a huge proponent of crowdfunding and push the envelope, we would in an ideal world have a proposal prepared July 2013 and voted on by the Commissioners by August 2013 at the very latest – in an ideal world. Another 90 days public hearing puts the proposal back to the end of October and then the SEC staff needs 45 days to summarize the public comments for the Commissioners to read. Thereafter they would need at the earliest 30 days to set up a vote. That puts us mid January 2014. Ideally, Mary Jo White will be pushing this as a priority. Note, Mary Jo White has already started recusing herself from many SEC cases due to previous work which does give her more time on her plate to attend this topic. Let’s wait and see.

Jan 2014 we could have the commissioners vote against it and another 6 months would be needed to recreate this same new proposal. Let’s assume in an ideal world the commissioners vote 3 yes for the proposal – then we would see FINRA[2] get the job of going through the same process starting at the very earliest end of February 2014 and now this cycle could take another 3-9 months. Crowdfunding for equity in this ideal world scenario would be a legal practice by Summer 2014.

On a more positive note, assuming Elysse Walters pushes through with a proposal before Mary Jo White is put into office or Mary Jo White does not get the position which is also possible, then a ruling by SEC could be possible by end of Q3, 2013.

Sara Hanks[3] of CrowdCheck.com[4] adds her perspective to this timeline. Of the final stages of approval, she says, “Legally there’s no way this can happen in less than three months, so the earliest point at which investment crowdfunding could be possible would be the third quarter. Normally FINRA rulemaking would follow SEC rulemaking but they are clearly doing a fair amount of work ahead of time, so the FINRA process might not result in much of a delay.”

We have been called pessimistic but we like to be referred to as realistic. We know that Title II Removal of the Solicitation Ban on SEC exemption Regulation D, exemption 506 has precedent over crowdfunding so we feel that crowdfunding will not be legal for companies to use until early summer 2014. We would like to be wrong and remember, we cannot predict the timeline with more accuracy until a SEC proposal has been submitted for public opinion.

There will be discussions on the regulatory changes of the JOBS Act and the financial impact of all six bills at Thomson Reuters‘ and The Soho Loft[5] Secondary market and restricted stock liquidity conference on the one year anniversary of the signing of the JOBS Act bill by President Obama in Boston this April 5, 2013. We would love to see a SEC proposal submitted by then for public commenting.

These are SEC processes put into place for a reason and changing the Chairs of the SEC has delayed this aspect of the law. We are working hard with the SEC to bring crowdfunding for equity into fruition and the world is watching the US as we collectively frame and move to enact this financial innovation.

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